Safe Harbour Rules to include foreign companies generating profits from India by selling raw diamonds

Following the budget announcement, the Central Board of Direct Taxes (CBDT) has expanded the ‘safe harbour rules’ to include foreign companies which are engaged in selling raw diamond here. This is expected to reduce litigations and further enhance ease of doing business.

In her budget speech, Finance Minister Nirmala Sitharaman had said: “With a view to reduce litigation and provide certainty in international taxation, we will expand the scope of safe harbour rules and make them more attractive.” Accordingly, CBDT has come out with a notification to amend the Income Tax Rules. New amendment “save as otherwise provided in these rules, they shall deem to have come into force on the 1st day of April, 2024.”

‘Safe harbour rules’ means circumstances in which the income tax authorities shall accept the transfer price declared by the taxpayer. ‘Transfer Price’ is the price that is paid for goods or services transferred from one unit of an organization to its other units situated in different countries (with exceptions).

The notification expands the definition of ‘eligible assessee’ by including a foreign company engaged in the business of diamond mining which has exercised an option for application of safe harbour rules in accordance with IT rules.  

‘Eligible Business’ means a business of selling raw diamonds in any notified special zone in India. ‘Gross receipts’ means the aggregates of the amount paid or payable to and the amount received or deemed to be received by the eligible assessee or by any person on his behalf on account of sale of raw diamonds.

Here ‘raw diamonds’ include uncut or unpolished, unassorted, unworked or simply sawn, cleaved or bruted and not conflict diamonds as defined by the Kimberley Process.

“The income-tax authorities shall accept the option for safe harbour exercised by an eligible assessee in any relevant previous year” where the income is as according to circumstance prescribed under the Income Tax Rules. The circumstance means “the profits and gains of the eligible business chargeable to tax under the head ‘Profits and gains of business or profession’ shall be 4 per cent. or more of the gross receipts from such business.”

Manish Garg, Lead-Transfer Pricing and Litigation with AKM Global said: “This move will provide tax certainty and stability to foreign companies planning to do diamond business in India. This is further expected to establish India’s position as a world leader in the diamond cutting and polishing sector, which already employs a large number of skilled workers.”